As per Financial Action Task Force (FATF), Money laundering is the processing of the criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardising their source.
As per US Department of Treasury, Financial Crimes Enforcement Network (FinCEN) 2, Money Laundering is the process of making illegally-gained proceeds (i.e. "dirty money") appear legal (i.e. "clean").
Money laundering can facilitate crimes such as Illegal arms sales, smuggling, and the activities of organised crime, including for example drug trafficking and prostitution rings, can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to “legitimise” the ill-gotten gains through money laundering.
When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.
Typically, Money Laundering involves three steps: placement, layering and integration. First, the illegitimate funds are furtively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the "dirty money" appears "clean".
Many countries as part of their efforts to address the menace of Money Laundering have formed various groups of countries and they have been listed here for ready reference3
- Financial Action Task Force (FATF)
- Asia/Pacific Group on Money Laundering (APG)
- Caribbean Financial Action Task Force (CFATF)
- Eurasian Group (EAG)
- Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG)
- Groupe d’Action contre le blanchiment d’Argent en Afrique Centrale (GABAC) - The Task Force on Money Laundering in Central Africa
- Financial Action Task Force of Latin America (GAFILAT)
1
http://www.fatf-gafi.org/faq/moneylaundering/#d.en.11223
2
https://www.fincen.gov/history-anti-money-laundering-laws
3
http://www.fatf-gafi.org/countries/
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- Inter Governmental Action Group against Money Laundering in West Africa (GIABA)
- Middle East and North Africa Financial Action Task Force (MENAFATF)
- The Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL)
FATF
In response to mounting concern over money laundering, the Financial Action Task Force on money laundering (FATF) was established by the G-7 Summit in Paris in 1989 to develop a co-ordinated international response. One of the first tasks of the FATF was to develop Recommendations, 40 in all, which set out the measures national governments should take to implement effective anti-money laundering programmes.
FATF in February 2012 as part of Anti Money Laundering (AML) and countering the financing of terrorism (CFT) standards has published “International Standards On Combating Money Laundering And The Financing Of Terrorism & Proliferation” and also later published many other relevant publications/ standards.
Virtual Currencies and Block Chain Technology
Virtual currency4 is a digital representation (1) a medium of exchange; and/or (2) a unit of account; and/or
- a store of value, but does not have legal tender status (i.e., when tendered to a creditor, is a valid and legal offer of payment) in any jurisdiction. It is not issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the virtual currency. Virtual currency is distinguished from fiat currency (a.k.a. “real currency,” “real money,” or “national currency”), which is the coin and paper money of a country that is designated as its legal tender; circulates; and is customarily used and accepted as a medium of exchange in the issuing country. It is distinct from e-money, which is a digital representation of fiat currency used to electronically transfer value denominated in fiat currency. E-money is a digital transfer mechanism for fiat currency – i.e., it electronically transfers value that has legal tender status.
Bitcoin is a worldwide cryptocurrency and digital payment system invented by an unknown programmer, or a group of programmers, under the name Satoshi Nakamoto. It was released as open-source software in 2009.
The system is peer-to-peer, and transactions take place between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called a blockchain. Since the system works without a central repository or single administrator, bitcoin is called the first decentralized digital currency.
Besides being created as a reward for mining, bitcoin can be exchanged for other currencies,products, and services in legal or black markets.
As of February 2015, over 100,000 merchants and vendors accepted bitcoin as payment.
4http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf
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According to research produced by Cambridge University in 20175 , there are 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using bitcoin.As per the said report the total cryptocurrency market capitalisation has increased more than 3x since early 2016, reaching nearly $25 billion in March 2017
Apart from Bitcoin (BTC) there are largest cryptocurrencies viz., ETHEREUM (ETH), DASH, MONERO (XMR), RIPPLE (XRP), LITECOIN (LTC)
The FinCEN guidance states that a user who obtains virtual currency and uses it to purchase real or virtual goods or services is not a Money Services Business (MSB). Importantly, the FinCEN guidance states that an administrator or exchange that 1) accepts and transmits a virtual currency or 2) buys or sells virtual currency for any reason is a money transmitter (an MSB) under FinCEN’s regulations and would be subject to the Banking Secrecy Act (BSA) monitoring and reporting requirements unless a limitation to or exemption from the definition applies to the person
As per the said report 24% of incorporated wallets have a formal license from a regulatory authority, and all of them are wallet providers that offer national-to-cryptocurrency exchange services. 25% of wallets providing centralised national-to- cryptocurrency exchange services do not have a government license
In order to keep more focus on the impact of cryptocurrencies on AML, for getting more details about Bitcoin the reader is requested to refer the paper presented by our team member which is available for download at http://sbsandco.com/wp-content/uploads/2017/06/June-2017-e-Journal-Digest.pdf
In order to give a Birds eye view some of the recent issues pertaining to illegal activities carried on by using virtual currencies are dwelled at length herein below:
Silk Road case
There was one significant case example cited to IRS6 that involved Ross Ulbricht, the creator and operator of the “Silk Road” website. Criminal Investigation participated in an investigation along with several other Federal Government agencies. According to court documents, Ulbricht created the Silk Road in January 2011 and owned and operated the underground website until it was shut down by law enforcement authorities in October 2013. The Silk Road served as a sophisticated and extensive criminal marketplace on the Internet where unlawful goods and services, including illegal drugs of virtually all varieties, were bought and sold regularly by the site’s users. While in operation, the Silk Road was used by thousands of drug dealers and other unlawful vendors to distribute hundreds of kilograms of illegal drugs and other unlawful goods and services to more than 100,000 buyers, and to launder hundreds of millions of dollars deriving from these unlawful transactions. Ulbricht sought to anonymize transactions on the Silk Road by operating it on a special network of computers on the Internet designed to conceal the identities of the networks’ users. Ulbricht also designed the Silk Road to include a bitcoin-based payment system that concealed the identities and locations of the users transmitting and receiving funds through the site.
5Global Cryptocurrency Benchmarking Study by Dr Garrick Hileman & Michel Rauchs
- https://www.treasury.gov/tigta/auditreports/2016reports/201630083fr.pdfand http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf
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The Silk Road case is an example of a successful collaborative Federal investigation, but it is also a reminder that the anonymity feature of some virtual currencies is what attracts unscrupulous individuals to their use. The IRS should prepare a comprehensive virtual currency strategy that will assist taxpayers lawfully engaged with virtual currencies to voluntarily comply with the tax laws while seeking to identify individuals unlawfully engaged in their use.
Liberty Reserve Case7
In what is to date the largest online money-laundering case in history, in May 2013, the US Department of Justice charged Liberty Reserve, a Costa Rica-based money transmitter, and seven of its principals and employees with operating an unregistered money transmitter business and money laundering for facilitating the movement of more than 6 billion USD in illicit proceeds. In a coordinated action, the Department of the Treasury identified Liberty Reserve as a financial institution of primary money laundering concern under Section 311 of the USA PATRIOT Act, effectively cutting it off from the US financial system.
Established in 2006, Liberty Reserve was designed to avoid regulatory and law enforcement scrutiny and help criminals distribute, store, and launder the proceeds of credit card fraud, identity theft, investment fraud, computer hacking, narcotics trafficking, and child pornography by enabling them to conduct anonymous and untraceable financial transactions. Operating on an enormous scale, it had more than a million users worldwide, including more than 200 000 in the United States, and handled approximately 55 million transactions, almost all of which were illegal. It had its own virtual currency, Liberty Dollars (LR), but at each end, transfers were denominated and stored in fiat currency (US Dollars)
To use LR currency, a user opened an account through the Liberty Reserve website. While Liberty Reserve ostensibly required basic identifying information, it did not validate identities. Users routinely established accounts under false names, including blatantly criminal names (“Russia Hackers,” “Hacker Account,” “Joe Bogus”) and blatantly false addresses (“123 Fake Main Street, Completely Made Up City, New York”). To add a further layer of anonymity, Liberty Reserve required users to make deposits and withdrawals through recommended third-party exchangers— generally, unlicensed money transmitting businesses operating in Russia, and in several countries without significant governmental money laundering oversight or regulation at that time, such as Malaysia, Nigeria, and Vietnam. By avoiding direct deposits and withdrawals from users, Liberty Reserve evaded collecting information about them through banking transactions or other activity that would create a central paper trail. Once an account was established, a user could conduct transactions with other Liberty Reserve users by transferring LR from his or her account to other users including transferring funds, making the transfers completely untraceable. After learning it was being investigated by US law enforcement, Liberty Reserve pretended to shut down in Costa Rica but continued to operate through a set of shell companies, moving millions through their accounts in Australia, Cyprus, China, Hong Kong, Morocco, Russia, Spain and elsewhere
7http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf
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Bitcoin related Ponzi Scheme8
The U. S. Attorney for the Southern District of New York, Preet Bharara, has issued several recent statements signaling a steady pursuit of criminal conduct related to bitcoin. First, on Thursday, November 6, 2014, Trendon Shavers was arrested and charged with one count of securities fraud and one count of wire fraud in connection with what Mr. Bharara describes as the “first federal criminal securities fraud case involving a bitcoin-related Ponzi scheme.” Notably, this criminal case follows a civil action against Mr. Shavers that was filed by the SEC in July 2013, and allowed to proceed in Texas federal court in August 2013. According to the criminal complaint filed in New York federal court, Mr. Shavers who runs a company called Bitcoin Savings and Trust – allegedly raised more than 764,000 bitcoin from investors between September 2011 and September 2012. Mr. Shavers allegedly told investors that he would engage in a bitcoin market arbitrage strategy (i.e., lending bitcoin to others for a fixed period of time, trading bitcoin via online exchanges, and selling bitcoin locally via private off-market transactions). In return for the investors’ bitcoin, Mr. Shavers promised up to one percent per day. According to the U.S. Attorney, however, Mr. Shavers failed to execute the claimed market arbitrage strategy, failed to honor investors’ redemption requests, and failed to deliver the agreed upon rates of interest.
Apart from the above cases, the recent Wanna Cry ransom ware has primarily used the Bitcoin to extract the money from the people, whose systems have been effected with the virus, to claim the data back.
Virtual Currencies and AML from India perspective
India is a member of FATF, APG and EAG. India has passed legislation for Anti Money-Laundering in the year 2002 called as Prevention of Money Laundering Act, 2002 (Act No. 15/2003) (PMLA 2002) and also framed Rules thereunder
The PMLA 2002 has approximately total 78 sections and one Schedule prescribing list of various offences considered to be Money Laundering activities.
RBI has issued two Press Releases dated 24th December, 2013 and 01st February, 2017 stating that it cautions Virtual Currencies (VCs), including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing the users, holders and traders of themselves
The RBI advises that it has not given any licence / authorisation to any entity / company to operate such schemes or deal with Bitcoin or any virtual currency. As such, any user, holder, investor, trader, etc. dealing with Virtual Currencies will be doing so at their own risk.
